Central government, RBI trying to find a middle ground

The RBU is unlikely to yield on its February 12 circular unless the government comes up with a convincing argument.

RBI may ease its stance on issues such as lending norms for small enterprises while the government may tone down its demand for transfer of excess RBI reserves as the two sides attempt to patch up differences, said people familiar with the institutions.

One likely outcome of the recent confrontation could be that the two may agree to form a committee to devise a formula for transfer of surplus reserves by the central bank to the government annually, which at present is discretionary.

“There could be a panel which could draw a road map on how to progressively transfer RBI’s surplus to the government,” said an economist, who did not want to be identified.

There have been disagreements between RBI and the Centre over several issues, including payment of dividend to the government. Ahead of the RBI board meeting on November 19, the two sides are working to arrive at a consensus though an agreement on all the issues would be elusive.

The bitter feud led to the Centre invoking Section 7 of the Reserve Bank of India Act to initiate consultations on various issues, including easier capital norms for weak state-run banks and providing liquidity to non-banking finance companies.

The RBI spokesperson did not respond to a mail sent by ET.

A key dispute over the past two years has been how much reserves RBI should keep with itself and how much it ought to transfer to the government. As government finances come under pressure amid slower growth and lower revenue collections, the Centre has been demanding higher dividend from RBI.

RBI has a cumulative Rs 2.49 lakh crore in its contingency and asset development funds. In the past year, the central bank had paid Rs 50,000 crore as dividend, which amounts to 20% of the reserves in that year.

The regulator, however, is unlikely to yield on its February 12 circular unless the government comes up with a convincing argument.

The circular mandated that banks must treat any big borrower missing payments by even a single day as a defaulter and begin preparations to avoid it turning into a bad loan. This led to litigation, with about a dozen power companies opposing the norms.

“As for the February 12 circular (and) the guideline for extending liquidity support to NBFCs, the government should explain its rationale for demanding such sector-specific relaxations,” said another economist.

The government, at the behest of NBFCs, has also been demanding that RBI come up with a solution to boost liquidity as these institutions are struggling to roll over borrowings after the IL&FS crisis.

While demand for funds has been rising, there have been no more defaults.